UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB
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(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 2002
[_] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
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Commission File Number: 0-32379
American Ammunition, Inc.
------------------------------------
(Exact name of small business issuer as specified in its charter)
California 91-2021594
-------------------------- ----------------------------
(State of incorporation) (IRS Employer ID Number)
3545 NW 71st Street, Miami, FL 33147
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(Address of principal executive offices)
(305) 835-7400
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(Issuer's telephone number)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: October 14, 2002: 54,114,560
Transitional Small Business Disclosure Format (check one): YES NO X
---- ---
American Ammunition, Inc.
Form 10-QSB for the Quarter ended September 30, 2002
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 20
Part II - Other Information
Item 1 Legal Proceedings 23
Item 2 Changes in Securities 24
Item 3 Defaults Upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 25
Signatures 25
Item 1 - Part 1 - Financial Statements
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Consolidated Balance Sheets
September 30, 2002 and 2001
(Unaudited)
September 30, September 30,
2002 2001
--------------- --------------
ASSETS
Current Assets
Cash on hand and in bank $ 238,695 $ 622,112
Accounts receivable - trade, net of
factored accounts of approximately
$-0- and $-0- and allowance for
doubtful accounts of $-0- and $-0-, respectively 232,821 -
Inventory 554,369 116,128
Prepaid expenses 19,647 7,323
------------- ------------
Total Current Assets 1,045,532 745,563
------------- ------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 6,683,688 6,468,864
Office furniture and fixtures 50,907 49,699
Leasehold improvements 193,606 182,052
------------- ------------
6,928,201 6,700,615
Accumulated depreciation (3,224,315) (2,005,907)
------------- ------------
Net Property and Equipment 3,703,886 4,694,708
------------- ------------
Other Assets
Deposits and other 77,860 59,712
------------- ------------
Total Other Assets 77,860 59,712
------------- ------------
TOTAL ASSETS $ 4,827,278 $ 5,499,983
============= ============
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
3
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Consolidated Balance Sheets - Continued
September 30, 2002 and 2001
(Unaudited)
September 30, September 30,
2002 2001
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable to a bank $ - $ -
Current maturities of leases payable 8,365 31,260
Accounts payable - trade 383,777 618,471
Customer deposits 30,000 -
Note payable to stockholder - 200,000
------------- ------------
Total Current Liabilities 422,142 849,731
Long-Term Liabilities
Note payable to a bank 650,000 950,000
Capital leases payable 11,175 43,142
------------- ------------
Total Liabilities 1,083,317 1,842,873
------------- ------------
Commitments and Contingencies
Mandatory Convertible Preferred Stock
1,620,720 and 46,000 shares
issued and outstanding, respectively 230,000 8,135,350
------------- ------------
Stockholders' Equity
Preferred stock - $0.001 par value
20,000,000 shares authorized.
1,795,320 shares allocated to Series A - -
Common stock - $0.001 par value.
300,000,000 shares authorized.
54,114,560 and 29,971,200 shares
issued and outstanding, respectively 54,115 29,971
Additional paid-in capital 16,052,506 4,971,029
Accumulated deficit (12,592,660) (9,479,240)
------------- ------------
Total Stockholders' Equity 3,513,961 (4,478,240)
------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,827,278 $ 5,499,983
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Consolidated Statements of Operations and Comprehensive Income (Loss)
Nine and Three months ended September 30, 2002 and 2001
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
----------------------------------------------------------------
Revenues $ 1,277,454 $ 350,969 $ 570,320 $ 14,438
--------------- -------------- ------------- -------------
Cost of Sales
Materials, Direct Labor
and other direct costs 1,236,388 275,048 630,484 31,125
Depreciation 483,537 454,906 163,238 151,635
--------------- -------------- ------------- -------------
Total Cost of Sales 1,719,925 729,954 793,722 182,760
--------------- -------------- ------------- -------------
Gross Profit (442,471) (378,985) (223,402) (168,322)
--------------- -------------- ------------- -------------
Operating Expenses
Research and development expenses 2,851 1,432 2,200 -
Marketing and promotion expenses 13,842 5,516 6,276 -
Other operating expenses 488,257 505,492 270,126 142,704
Interest expense 76,060 277,685 14,941 105,391
Depreciation expense 3,061 8,022 248 2,610
Compensation expense related to common
stock issuances at less than "fair value" 11,346 - 11,346 -
--------------- -------------- ------------- -------------
Total Operating Expenses 595,417 798,147 305,137 250,705
--------------- -------------- ------------- -------------
Loss from Operations (1,037,888) (1,177,132) (528,539) (419,027)
Other Income (Expense)
Settlement of litigation - 754,830 - -
Interest and other income 11,048 3,777 515 -
--------------- -------------- ------------- -------------
Income (Loss) before Income Taxes (1,026,840) (418,525) (528,024) (419,027)
Provision for Income Taxes - - - -
--------------- -------------- ------------- -------------
Net Income (Loss) (1,026,840) (418,525) (528,024) (419,027)
Other Comprehensive Income - - - -
--------------- -------------- ------------- -------------
Comprehensive Income (Loss) $ (1,026,840) $ (418,525) $ (528,024) $ (419,027)
=============== ============== ============= =============
Loss per weighted-average share of
common stock outstanding, computed
on net loss - basic and fully diluted $ (0.02) $ (0.01) $ (0.01) $ (0.01)
=============== ============== ============= =============
Weighted-average number of
common shares outstanding 51,885,746 29,971,200 53,395,558 29,971,200
=============== ============== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
-------------- -------------
Cash flows from operating activities
Net loss for the period $ (1,026,840) $ (418,525)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 486,598 573,994
Compensation expense related to common
stock issuances at less than "fair value" 11,346 -
Gain on litigation settlement - (754,830)
Common stock issued for fees and services 50,520 127,458
Accrued interest converted to common stock 240,440
(Increase) Decrease in
Accounts receivable (232,821) 60,415
Inventory (239,628) 217,282
Prepaid expenses, deposits and other (13,739) (7,323)
Increase (Decrease) in
Accounts payable - trade 110,730 (66,203)
Interest payable - (2,000)
Excise taxes payable (8,641) (27,380)
Customer deposits 30,000 -
-------------- -------------
Net cash used in operating activities (832,475) (92,672)
-------------- -------------
Cash flows from investing activities
Purchase of property and equipment (225,229) (103,300)
-------------- -------------
Net cash used in investing activities (225,229) (103,300)
-------------- -------------
Cash flows from financing activities
Decrease in cash overdraft - 7,760
Cash received (paid) on short term loans - net - (451,652)
Cash received on long-term loans - 950,000
Cash paid on long-term loans (300,000) -
Principal paid on long-term capital leases (6,173) (33,882)
Cash received on sale of Mandatory
Convertible Preferred Stock 345,000
Cash received on sale of common stock 1,006,153 -
-------------- -------------
Net cash provided by financing activities 699,980 817,226
-------------- -------------
Increase (Decrease) in Cash (357,724) 621,254
Cash at beginning of year 596,419 858
-------------- -------------
Cash at end of year $ 238,695 $ 622,112
============== =============
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
6
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
-------------- -------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 52,060 $ 39,245
============== =============
Income taxes paid for the period $ - $ -
============== =============
Supplemental disclosure of non-cash
investing and financing activities
Conversion of debt and accrued interest
payable to a shareholder into preferred stock $ - $ 7,553,600
============== =============
Conversion of debt and accrued interest
payable to a shareholder into common stock $ 125,000 $ -
============== =============
Common stock issued in payment of trade accounts payable $ 188,855 $ -
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
7
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements
Note A - Organization and Description of Business
American Ammunition, Inc. (AAI or Company) was incorporated on February 1, 2000
in the State of California as FirsTelevision.com. AAI subsequently changed its
corporate name to FBI Fresh Burgers International with a business plan of
marketing the concept of a national "fast food" restaurant chain to children and
young adults, with a menu of fresh burgers, fries and sandwiches. However, there
was no assurance that this business concept would be successful.
On September 29, 2001, the Company, F&F Equipment, Inc. (F&F) and the individual
shareholders of F&F entered into an "Agreement For The Exchange Of Common Stock"
(Exchange Agreement) whereby the shareholders of F&F exchanged 100.0% of the
issued and outstanding stock of F&F for 21,000,000 post-forward split shares of
restricted, unregistered common stock of the Company. F&F Equipment, Inc. then
became a wholly-owned subsidiary of the Company.
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
On October 9, 2001, the Company effected a three (3) for one (1) forward stock
split. This action caused the then issued and outstanding shares to increase
from 2,990,400 to 8,971,200 on the action date. The effect of this action is
reflected in the accompanying financial statements as of the first day of the
first period presented.
F&F Equipment, Inc.(Company) was incorporated on October 4, 1983 under the laws
of the State of Florida. The Company was formed to engage principally in the
"import, export, retail & wholesale of firearms equipment, ammunition & other
devices and for the purpose of transacting any and/or all lawful business." The
Company conducts its business operations under the assumed name of "American
Ammunition".
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co. (IPE), which started production on June 14,
2002. IPE is a fully licensed and approved state of the art electrochemical
metallization facility with enormous capacity for processing the Company's line
of projectiles as well as other products and services while employing
environmentally sound water conservation and proven waste treatment techniques.
The facility meets or exceeds all current environmental requirements and enjoys
the "conditionally exempt small quantity generator" status for State and Federal
regulations.
Note B - Preparation of Financial Statements
The acquisition of F&F Equipment, Inc., on September 29, 2001, by the Company
effected a change in control and was accounted for as a "reverse acquisition"
whereby F&F Equipment, Inc. is the accounting acquiror for financial statement
purposes. Accordingly, for all periods subsequent to the September 29, 2001
change in control transaction, the financial statements of the Company reflect
the historical financial statements of F&F Equipment, Inc. from its inception on
October 4, 1983 and the operations of the Company subsequent to September 29,
2001.
8
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note B - Preparation of Financial Statements - Continued
The Company and its subsidiaries follow the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States of
America and have adopted a year-end of December 31 for all entities.
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-KSB for the year ended
December 31, 2001. The information presented within these interim financial
statements may not include all disclosures required by accounting principles
generally accepted in the United States of America and the users of financial
information provided for interim periods should refer to the annual financial
information and footnotes when reviewing the interim financial results presented
herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-QSB, are unaudited and contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations and cash flows of
the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately
will be reported for the full fiscal year ending December 31, 2002.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management further acknowledges that it is solely responsible for adopting sound
accounting practices, establishing and maintaining a system of internal
accounting control and preventing and detecting fraud. The Company's system of
internal accounting control is designed to assure, among other items, that 1)
recorded transactions are valid; 2) valid transactions are recorded; and 3)
transactions are recorded in the proper period in a timely manner to produce
financial statements which present fairly the financial condition, results of
operations and cash flows of the Company for the respective periods being
presented
For segment reporting purposes, the Company operated in only one industry
segment during the periods represented in the accompanying financial statements
and makes all operating decisions and allocates resources based on the best
benefit to the Company as a whole.
The accompanying consolidated financial statements contain the accounts of
American Ammunition, Inc. (formerly FBI Fresh Burgers International) and its
wholly-owned subsidiaries, F&F Equipment, Inc. and Industrial Plating Enterprise
Co. All significant intercompany transactions have been eliminated. The
consolidated entities are collectively referred to as "Company".
(Remainder of this page left blank intentionally)
9
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies
1. Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash on hand and
in banks, including accounts in book overdraft positions, certificates of
deposit and other highly-liquid investments with maturities of three months or
less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of making
bank deposits and releasing checks, in accordance with the Company's cash
management policies.
2. Accounts receivable
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers which are located throughout the United States.
Because of the credit risk involved, management has provided an allowance for
doubtful accounts which reflects its opinion of amounts which will eventually
become uncollectible. In the event of complete non-performance, the maximum
exposure to the Company is the recorded amount of trade accounts receivable
shown on the balance sheet at the date of non-performance.
3. Inventory
Inventory consists of raw materials, work-in-process and finished goods related
to the production and sale of small arms ammunition. Inventory is valued at the
lower of cost or market using the first-in, first-out method.
4. Property, plant and equipment
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets using the
straight-line method, generally three to ten years.
Gains and losses from disposition of property and equipment are recognized as
incurred and are included in operations.
5. Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
At September 30, 2002 and 2001, the deferred tax asset and deferred tax
liability accounts, as recorded when material to the financial statements, are
entirely the result of temporary differences. Temporary differences represent
differences in the recognition of assets and liabilities for tax and financial
reporting purposes, primarily accumulated depreciation and amortization,
allowance for doubtful accounts and vacation accruals.
As of September 30, 2002 and 2001, the deferred tax asset related to the
Company's net operating loss carryforward is fully reserved. If these
carryforwards are not utilized, they will begin to expire in 2005.
10
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
6. Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income (loss) by
the weighted-average number of shares of common stock and common stock
equivalents (primarily outstanding options and warrants). Common stock
equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method. The
calculation of fully diluted earnings (loss) per share assumes the dilutive
effect of the exercise of outstanding options and warrants at either the
beginning of the respective period presented or the date of issuance, whichever
is later. As of September 30, 2002 and 2001, and subsequent thereto, the Company
had no warrants and/or options outstanding.
7. Advertising costs
The Company does not conduct any direct response advertising activities. For
non-direct response advertising, the Company charges the costs of these efforts
to operations at the first time the related advertising is published.
8. Reclassifications
Certain amounts in the accompanying financial statements for the quarter ended
September 30, 2001 have been reclassified to conform to the Fiscal 2002
presentations.
Note D - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
Note E - Inventory
As of September 30, 2002, inventory consisted of the following components:
September 30, 2002
Raw materials $207,574
Work in process 264,048
Finished goods 82,747
---------
Totals $554,369
=========
11
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note F - Property and Equipment
Property and equipment consist of the following components:
September 30, September 30, Estimated
2002 2001 useful life
------------------------------------------------
Manufacturing equipment $6,683,688 $6,468,864 10 years
Office furniture and fixtures 50,907 49,699 7 years
Leasehold improvements 193,606 182,052 20 years
---------- ----------
6,928,201 6,700,615
Accumulated depreciation (3,224,315) (2,005,907)
---------- ----------
Net property and equipment $3,703,866 $4,694,708
========== ==========
Total depreciation expense charged to operations for the nine months ended
September 30, 2002 and 2001, respectively, was approximately $486,598 and
$462,928, respectively.
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long-term capital leases:
September 30, September 30,
2002 2001
-------------------------------
Manufacturing and processing equipment $153,400 $153,400
Less accumulated depreciation (50,694) (35,344)
-------- --------
$106,551 $118,056
======== ========
Note G - Notes payable to a Bank
During 2001, the Company was operating under a bank approved moratorium on the
payment of principal and interest on all notes payable and the Company and its
President commenced litigation against the lending institution. On June 29,
2001, the Company and the Bank executed a Settlement and Compromise Agreement
whereby all loans and debts of the Company to the Bank were settled and
cancelled for a one-time cash payment of $550,000. The source of funds for the
$550,000 settlement came from a new $950,000 note payable to another financial
institution.
As a result of the June 29, 2001 transaction, the Company recognized a one-time
gain on the settlement of approximately $754,830 on the settlement date.
12
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note H - Capital Leases Payable
Capital leases payable consist of the following as of September 30, 2002 and
2001, respectively:
September 30, September 30,
2002 2001
----------------------------
Three and six capital leases, respectively, payable to
various equipment financing companies. Interest, at
September 30, 2002, ranging between 11.37% and 14.05%.
Payable in aggregate monthly installments of approximately
$935, including accrued interest, as of September 30, 2002.
Final maturities occur between September 2004 and December
2004. Collateralized the underlying leased manufacturing
equipment. $ 19,540 $ 74,402
Less current maturities (8,365) (31,260)
----------- ------------
Long-term portion $ 11,175 $ 43,142
=========== ============
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
------------------------
2002 $ 8,365
2003 9,507
2004 1,668
--------
Totals $ 19,540
========
Note I - Long-Term Debt Payable to a Bank
On June 28, 2001, in anticipation of the settlement of litigation with a
financial institution, the Company executed a $950,000 note payable to another
financial institution. This note bears interest at the Wall Street Journal
published prime rate plus 2.0%.
During July, August and September 30, 2002, the Company made three (3) lump-sum
principal reductions of $100,000 each (or an aggregate of $300,000) to the
outstanding balance on this note. As of September 30, 2002, the Company owes
$650,000 on this note. Upon each lump-sum payment, the Company executed a
modification to the payment terms on the note.
At September 30, 2002, the note payment terms are as follows: payments of
interest only beginning July 28, 2003 through January 28, 2004. Thereafter,
starting on January 28, 2004, equal monthly payments of principal and interest
shall be due until June 28, 2007 which payments shall represent the amount
necessary to fully amortize the remaining principal balance of the note. The
monthly payments shall be recalculated at the time of any change in the
applicable interest rate. The note is secured by virtually all of the Company's
real and personal property. A portion of the proceeds from the financing were
used to pay the $550,000 required in the Settlement and Compromise Agreement.
13
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note J - Preferred Stock Transactions
In September and October 2001, the Company issued 222,600 shares of $5.00 Series
A Convertible Preferred Stock (Series A Preferred Stock) for total proceeds of
approximately $1,113,000 through an ongoing private placement. The Series A
Convertible Preferred Stock provides for cumulative dividends at a rate of 8.0%
per year, payable quarterly, in cash or shares of the Company's common stock at
the Company's election. Each share of Series A Preferred Stock is convertible
into 11 shares of the Company's common stock at any time after 6 months of the
date of issue and prior to the notice of redemption at the option of the holder,
subject to adjustments for customary anti- dilution events.
In September 2001, the Company's principal shareholder converted approximately
$4,007,327 of unsecured debt and approximately $3,546,273 of cumulative and
unpaid accrued interest into 1,510,710 shares of Series A Preferred Stock.
In September 2001, a creditor of the Company agreed to convert approximately
$10,000 of trade accounts payable into 2,000 shares of Series A Preferred Stock.
In February 2002, certain holders of the Series A Preferred Stock notified the
Company of their intent to exercise the conversion features on 1,749,320 issued
and outstanding shares of Series A Preferred Stock into 19,242,520 shares of
common stock. Due to the timing of the conversion in relation to the Company's
year-end and the first available date for such conversion, the effect of the
conversion exercise is reflected in the accompanying financial statements as if
the conversion had occurred on December 31, 2001.
In conjunction with the issuance of certain shares of the Series A Preferred
Stock, certain shares were issued with an equivalent per share value of common
stock below the ending quoted market price of the Company's common stock on the
issue date. This difference created a Beneficial Conversion Feature Discount of
approximately $1,207,993. This discount was then amortized over the unexpired
time period between the date of issue of the eligible shares and the initial
eligible conversion date. Approximately $392,114 was amortized to operations and
the unamortized balance was reclassified to additional paid-in capital on
December 31, 2001 as a result of the February 2002 conversion exercise.
Note K - Common Stock Transactions
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
On October 9, 2001, the Company effected a three (3) for one (1) forward stock
split. This action caused the then issued and outstanding shares to increase
from 2,990,400 to 8,971,200 on the action date. The effect of this action is
reflected in the accompanying financial statements as of the first day of the
first period presented.
14
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note K - Common Stock Transactions - Continued
In March and May 2001, the Company issued an aggregate 496,200 post-reverse
split shares (165,400 pre-forward split shares) of common stock, pursuant to a
Registration Statement on Form SB-2, to various individuals providing
investment, financial and acquisition consulting services to the Company. These
transactions were cumulatively valued at approximately $165,400, which
approximates the "fair value" of the services provided. These amounts are
charged to operations in the accompanying pre-acquisition consolidated financial
statements.
In September 2001, the Company issued 2,625,000 post-reverse split shares
(875,000 pre-forward split shares) of common stock, pursuant to a Registration
Statement on Form SB-2, to six individuals providing investment and financial
consulting services to the Company. These transactions were cumulatively valued
at approximately $875,000, which approximates the "fair value" of the services
provided. These amounts are charged to operations in the accompanying
pre-acquisition consolidated financial statements.
In September 2001, the Company issued an aggregate 21,000,000 post-forward split
shares of restricted, unregistered common stock to the shareholders of F&F
Equipment, Inc. in exchange for 100.0% of the issued and outstanding stock of
F&F Equipment, Inc. F&F Equipment, Inc. became a wholly-owned subsidiary of the
Company as a result of this transaction.
In December 2001, the Company issued 222,222 shares of post-forward split shares
of restricted, unregistered common stock to an unrelated entity in exchange for
the cancellation of $100,000 of short-term debt. On February 27, 2002, the
Company issued an additional 277,777 shares of restricted, unregistered common
stock in payment for $100,000 in short-term debt payable and $25,000 in
agreed-upon interest payable to a shareholder, thereby satisfying all
outstanding short-term debt in full.
In December 2001, the Company issued 535,272 shares of restricted, unregistered
common stock to a creditor in settlement of approximately $242,872 in open trade
accounts payable.
In February 2002, the Company converted $125,000 in short-term debt payable to
an existing shareholder and accrued interest of approximately $24,000 into
277,778 shares of restricted, unregistered common stock. This transaction was
consummated at a price of $0.45 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of the respective transaction.
In March 2002, in two separate transactions, the Company sold an aggregate
1,388,890 shares of restricted, unregistered common stock to two separate
investors for aggregate proceeds of approximately $500,000. Each sale was made
at a price of $0.36 per share, which approximates the discounted "fair value" of
the Company's common stock based on the quoted closing price of the Company's
common stock on the date of each respective transaction.
In March 2002, the Company issued 32,000 shares of restricted, unregistered
common stock to a member of the Company's Board of Directors for consulting
services related to the Company's reverse merger transaction and for various
marketing services. This transaction was valued at approximately $11,520, or
$0.36 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction.
15
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note K - Common Stock Transactions - Continued
In March 2002, the Company issued 41,665 shares of restricted, unregistered
common stock to an unrelated party for shareholder and other public relation
services. This transaction was valued at approximately $15,000, or $0.36 per
share, which approximates the discounted "fair value" of the Company's common
stock based on the quoted closing price of the Company's common stock on the
date of the respective transaction.
In April and May 2002, the Company issued an aggregate 432,721 shares of
restricted, unregistered common stock to three creditors in settlement of
approximately $182,017 in open trade accounts payable. Each issuance was made at
a price of either $0.45 or $0.36 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of each respective transaction.
In June 2002, the Company issued 347,223 shares of restricted, unregistered
common stock to an existing shareholder to reimburse said shareholder for the
payment of legal fees associated with the bank related litigation concluded in
June 2001 and related consulting services. This transaction was valued at
approximately $125,000, or $0.36 per share, which approximates the discounted
"fair value" of the Company's common stock based on the quoted closing price of
the Company's common stock on the date of the respective transaction.
In June 2002, the Company sold 277,778 shares of restricted, unregistered common
stock to an investor for aggregate proceeds of approximately $100,000. This sale
was made at a price of $0.36 per share, which approximates the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction.
In July 2002, the Company sold 384,615 shares of restricted, unregistered common
stock to an existing shareholder for cash proceeds of approximately $100,000.
This sale was made at a price of $0.26 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction.
In August 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of $100,000. This sale
was made at a price of $0.26 per share, which was below the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The
differential between the discounted "fair value" (approximately $0.29 per share)
and the selling price resulted in a charge to operations of approximately
$11,346 for compensation expense related to common stock issuances at less than
"fair value".
In August 2002, the Company sold 20,506 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$6,152. This sale was made at a price of $0.30 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction.
In September 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.36 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction.
16
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note K - Common Stock Transactions - Continued
In September 2002, the Company sold 277,778 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$100,000. This sale was made at a price of $0.26 per share, which approximates
the discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction.
Note L - Related Party Transactions
The Company leases its corporate office and manufacturing facility from its
controlling stockholder under a long- term operating lease agreement. The lease
requires a monthly payment of approximately $5,410, inclusive of applicable
sales taxes. Further, the Company is responsible for all utilities and
maintenance expenses. The lease expires on October 31, 2003 and contains a
clause that the lease may be renewed for an additional ten year period upon
written notification to the lessor no later than 120 days prior to the scheduled
expiration date at a rental rate based upon the fair value for similar space in
a similar location.
Note M - Income Taxes
The components of income tax (benefit) expense for the nine months ended
September 30, 2002 and 2001, respectively, are as follows:
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
--------------------------------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
======= ======
As of September 30, 2002, the Company has a net operating loss carryforward of
approximately $3,500,000 to offset future taxable income. Subject to current
regulations, components of this carryforward will begin to expire in 2003. The
amount and availability of the net operating loss carryforwards may be subject
to limitations set forth by the Internal Revenue Code. Factors such as the
number of shares ultimately issued within a three year look-back period; whether
there is a deemed more than 50 percent change in control; the applicable
long-term tax exempt bond rate; continuity of historical business; and
subsequent income of the Company all enter into the annual computation of
allowable annual utilization of the carryforwards.
17
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note M - Income Taxes - Continued
The Company's income tax expense (benefit) for the nine months ended September
30, 2002 and 2001, respectively, differed from the statutory federal rate of 34
percent as follows:
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
------------------------------
Statutory rate applied to income before income taxes $(350,000) $(142,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 350,000 142,000
--------- ---------
Income tax expense $ - $ -
========= =========
Temporary differences, consisting primarily of statutory differences in the
depreciable lives for property and equipment, between the financial statement
carrying amounts and tax bases of assets and liabilities give rise to deferred
tax assets and liabilities as of September 30, 2002 and 2001, respectively:
September 30, September 30,
2002 2001
------------------------------
Deferred tax assets - long-term
Net operating loss carryforwards $ 2,150,000 $ 1,375,000
Deferred tax liabilities - long-term
Statutory depreciation differences (250,000) (280,000)
------------- ------------
1,900,000 1,095,000
Less valuation allowance (1,900,000) (1,095,000)
------------- ------------
Net Deferred Tax Asset $ - $ -
============= ============
During the nine months ended September 30, 2002 and 2001, respectively, the
valuation allowance increased (decreased) by approximately $950,000 and
$145,000.
Note N - Significant Customers
During the years ended December 31, 2001 and 2000, respectively, the Company had
a single customer responsible for approximately 51% and 32% of total sales.
There were no other customers responsible for more than 10.0% of total net sales
during 2001 and 2000, respectively. These trends were also in place at September
30, 2002 and 2001, respectively, and are anticipated to continue for the
foreseeable future.
(Remainder of this page left blank intentionally)
18
American Ammunition, Inc. and Subsidiaries
(formerly FBI Fresh Burgers International)
Notes to Consolidated Financial Statements - Continued
Note O - Subsequent Event
On October 4, 2002, the Company issued an 8.0% Convertible Debenture (Debenture)
in the face amount of $250,000 and a Warrant which requires the Holder to
purchase shares of common stock equal to ten (10) times the number of shares of
common stock issued to the Holder on conversion of the Debenture. In no event
shall the number of shares issued under the Warrant exceed 30,000,000.
The Debenture bears interest at 8.0% and matures two years from the date of
issuance. The Debenture is convertible into common stock, at the option of the
Holder, at the lesser of $1.00 per share or 80.0% of the average of the 5 lowest
volume weighted average price days during the 20 trading days before, but not
including the date of the Holder's election to convert. The Warrant is
exercisable at the same price.
The full principal amount of the Debenture is due upon default, as defined in
the Debenture agreement. The Debenture interest is payable monthly in arrears
commencing on November 15, 2002.
The Company is obligated to file a Registration Statement under the Securities
Act of 1933 to register the underlying conversion shares on either Form SB-2 or
S-3 and have said Registration Statement effective no later than 120 days after
October 4, 2002. Further, the Holder has agreed to convert not less than 5.0%
and not more than 10.0% of the original face value of the Debenture monthly
beginning the month after the effective date of the Registration Statement and
the Holder is required to exercise warrants and purchase shares of common stock
equal to ten (10) times the number of shares of common stock issued to the
Holder on conversion of the Debenture.
The Holder has further contractually agreed to restrict its ability to convert
the Debenture or exercise their warrants and receive shares of the Company's
common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock of the Company.
In the event an election to convert is made and the volume weighted average
price of the Company's common stock is below $0.30 per share, the Company shall
have the right to prepay any portion of the outstanding Debenture that was
elected to be converted, plus any accrued and unpaid interest, at 125.0%.
The Holder may demand repayment of the Debenture of 125.0% of the face amount
outstanding, plus all accrued and unpaid interest, in cash at any time prior to
the date that underlying Registration Statement under the Securities Act of 1933
has not been declared effective by the U. S. Securities and Exchange Commission
within 3 business days of such demand. If the repayment is accelerated, the
Company is also obligated to issue to the Holder 25,000 shares of common stock
and $10,000 cash for each 30 day period, or portion thereof, during which the
face amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
If the Holder does not elect to accelerate the Debenture, the Company shall
immediately issue and pay to the Holder 25,000 shares of common stock and
$10,000 cash for each 30 day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
Concurrent with the execution of the Debenture agreement, the Company executed
an engagement letter with the Holder's counsel for legal representation with
regard to the preparation of the aforementioned Registration Statement under the
Securities Act of 1933.
19
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(1) Caution Regarding Forward-Looking Information
Certain statements contained in this quarterly filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-QSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
(2) Summary
American Ammunition, Inc. (AAI or Company) was incorporated on February 1, 2000
in the State of California as FirsTelevision.com. AAI subsequently changed its
corporate name to FBI Fresh Burgers International with a business plan of
marketing the concept of a national "fast food" restaurant chain to children and
young adults, with a menu of fresh burgers, fries and sandwiches. However, there
was no assurance that this business concept would be successful.
On September 29, 2001, the Company, F&F Equipment, Inc. (F&F) and the individual
shareholders of F&F entered into an "Agreement For The Exchange Of Common Stock"
(Exchange Agreement) whereby the shareholders of F&F exchanged 100.0% of the
issued and outstanding stock of F&F for 21,000,000 post-forward split shares of
restricted, unregistered common stock of the Company. F&F Equipment, Inc. then
became a wholly-owned subsidiary of the Company.
The acquisition of F&F Equipment, Inc., on September 29, 2001, by the Company
effected a change in control and was accounted for as a "reverse acquisition"
whereby F&F Equipment, Inc. is the accounting acquiror for financial statement
purposes. Accordingly, for all periods subsequent to the September 29, 2001
change in control transaction, the financial statements of the Company reflect
the historical financial statements of F&F Equipment, Inc. from its inception on
October 4, 1983 and the operations of the Company subsequent to September 29,
2001.
Concurrent with the September 29, 2001 reverse acquisition transaction, the
Company amended its Articles of Incorporation to change the Company's name to
American Ammunition, Inc. and modified the Company's capital structure to allow
for the issuance of up to 320,000,000 total equity shares consisting of
20,000,000 shares of preferred stock and 300,000,000 shares of common stock.
Both classes of stock have a par value of $0.001 per share.
20
On October 9, 2001, the Company effected a three (3) for one (1) forward stock
split. This action caused the then issued and outstanding shares to increase
from 2,990,400 to 8,971,200 on the action date. The effect of this action is
reflected in the accompanying financial statements as of the first day of the
first period presented.
F&F Equipment, Inc.(Company) was incorporated on October 4, 1983 under the laws
of the State of Florida. The Company was formed to engage principally in the
"import, export, retail & wholesale of firearms equipment, ammunition & other
devices and for the purpose of transacting any and/or all lawful business." The
Company conducts its business operations under the assumed name of "American
Ammunition".
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co. (IPE), which has started production on June
14, 2002. IPE is a fully licensed and approved state of the art electrochemical
metallization facility with enormous capacity for processing the Company's line
of projectiles as well as other products and services while employing
environmentally sound water conservation and proven waste treatment techniques.
The facility meets or exceeds all current environmental requirements and enjoys
the "conditionally exempt small quantity generator" status for State and Federal
regulations.
The Company and its subsidiary have a year-end of December 31 and uses the
accrual method of accounting.
(3) Results of Operations
Nine months ended September 30, 2002 compared to Nine months ended September 30,
2001
During the first quarter of 2001, the Company filed a lawsuit against its
financial institution extending the Company various working capital credit. As a
result of this litigation, the Company became unable to access credit lines for
working capital, offer selling terms comparable to its competitors and,
accordingly, experienced a significant reduction in sales from prior years. This
litigation was settled during June 2001 and the Company negotiated a new working
capital note with a different financial institution which provided liquidity for
the remainder of 2001.
During the nine months ended September 30, 2002, the Company experienced
aggregate revenues of approximately $1,277,000 as compared to approximately
$351,000 for the first nine months ended September 30, 2001. For the three month
period ended September 30, 2002 and 2001, respectively, the Company realized
revenues of approximately $570,000 and $14,000.
The Company continues to experience positive demand for the Company's products.
During the quarter ended March 31, 2002, management elected to focus its
efforts, capital resources and energies in streamlining production methods,
securing key sources of raw material and exploring the addition of equipment to
allow the Company to produce certain components of its manufacturing process
which are currently being outsourced to unrelated third parties.
During June 2002, the Company initiated production of plating operations for
projectiles utilized in the Company's small-arms ammunition manufacturing
process through it's newly formed wholly-owned subsidiary, Industrial Plating
Enterprise Co. Further, during the three months ended June 30, 2002, management
began to actively seek and process orders for products, resulting in an increase
in sales of approximately $374,000, or 112.3% over the same period of the
preceding year.
During the quarter ended September 30, 2002, the Company expanded its production
capability with the addition of a second production shift. Due to the necessary
lead times for hiring and training qualified personnel, the Company experienced
increases in direct labor of approximately $43,000, plus related payroll burdens
in the third quarter of 2002.
Management continues to anticipate events occurring in future quarters including
increased levels of expenditures for marketing, increased product demand as a
result of increased market exposure and the introduction of new products under
development.
21
The Company experienced costs of goods sold of approximately $1,719,000 and
$730,000 for the nine months ended September 30, 2002 and 2001, respectively.
The Company experiences variable costs in the area of material consumption and
direct labor. The Company has recognized depreciation expense on production
equipment of approximately $484,000 and $455,000, respectively, in the above
cost of goods expense totals. These depreciation levels are anticipated to
remain fairly constant for future periods as management anticipates that the
acquisition of equipment for IPE will allow the Company to produce certain
components which were previously outsourced to unrelated third parties.
For the nine months ended September 30, 2002 and 2001, respectively, has
generated a negative gross profit of approximately $(442,000), or (34.64%), and
approximately $(379,000), or (108.0%). For the comparable three month period
ended September 30, 2002 and 2001, respectively, the Company's gross margin was
approximately $(223,000), or (39.2%), and $(168,000), or (1,165.8%). The Company
anticipates that with continued demand for its product, anticipated lower
production costs from internally generated plating activities and adequate
liquidity, it will be able to generate a positive gross profit by the end of
Calendar 2002. Further, management has developed a new model for the pricing of
its products to its customers. It is anticipated that this model will allow
management to better manage expense levels, control labor costs and maximize
revenue opportunities.
The Company experiences relatively consistent expenditure levels for executive
and administrative compensation, interest expense and depreciation expense. The
Company renegotiated its working capital note payable in June 2001. This note
bears interest at the Wall Street Journal published prime rate plus 2.0%.
In the months of July, August and September 2002, the Company reduced the
outstanding principal and prepaid the interest on the debt through July 28,
2003. The note payment terms were also modified as follows: payments of interest
only beginning July 28, 2003 through January 28, 2004. Thereafter, starting on
January 28, 2004, equal monthly payments of principal and interest shall be due
until June 28, 2007 which payments shall represent the amount necessary to fully
amortize the remaining principal balance of the note. The monthly payments shall
be recalculated at the time of any change in the applicable interest rate. As of
September 30, 2002, the Company owes $650,000 on this note.
The note is secured by virtually all of the Company's real and personal
property. A portion of the proceeds from the financing were used to pay the
$550,000 required in the Settlement and Compromise Agreement. Accordingly, the
Company anticipates relatively stable interest expense, or declining levels, in
future periods depending on expansion and additional equipment financing
requirements. The Company does not anticipate the addition of significant
additions to office and administrative personnel.
The Company experienced nominal research and development expenses during the
nine months ended September 30, 2002 and 2001 related to the development of a
new patent-pending projectile for use in ammunition specifically for the public
safety and security marketplace, especially in the rapidly expanding U. S. Air
Marshall program and other product improvements.
Due to the lack of liquidity in 2001 and prior years, the Company has not
developed an extensive marketing effort. Accordingly, expenditures in this area
have been nominal. Due to improved liquidity during the last 1/2 of 2001 and for
future periods, the Company anticipates, as internally generated funds are
available, to increase its marketing efforts to boost sales.
Other general and administrative expenses decreased significantly from
approximately $505,000 for the first nine months of 2001 to approximately
$488,000 for the first nine months of 2002. The most significant reductions came
in interest expense as a result of settling all litigation with the Company's
former lending institution and lesser savings in the areas of legal and
professional fees and other general and administrative fees.
The Company recognized a net loss of approximately $(1,026,000) and $(419,000)
for the respective nine month periods ended September 30, 2002 and 2001,
respectively, or $(0.02) and $(0.01) per share.
22
(4) Liquidity and Capital Resources
As of September 30, 2002, December 31, 2001, and September 30, 2001,
respectively, the Company had working capital of approximately $623,000,
$341,000, and $(104,000). The Company's working capital position improved
significantly in Calendar 2001 with the settlement of litigation involving its
outstanding debt to its-then financial institution and the concurrent
restructuring of working capital debt into a long-term instrument.
The Company has generated (used) cash in operating activities of approximately
$(832,000), $(1,100,000) and $(93,000) during the nine months ended September
30, 2002, the year ended December 31, 2001 and the nine months ended September
30, 2001. The most significant use of cash during the nine months ended
September 30, 2002 was the buildup of inventory and the cost of sales related to
the sale of merchandise on "industry standard" credit terms causing an increase
in accounts receivable and an increase in inventory, particularly raw materials
and work in process, to fulfill existing and anticipated product orders.
The Company anticipates that its improved liquidity position will continue to
improve as management is of the opinion that the production capacity is in place
to support all existing orders and accept existing inquiries which have
previously been denied due to the lack of production capacity and liquidity.
During the nine months ended September 30, 2002, the Company added approximately
$225,000 in new equipment, principally in it's new wholly-owned subsidiary,
Industrial Plating Enterprise Co. This equipment allows the Company to replace
previously outsourced portions of it's manufacturing process with internally
managed processes which is anticipated to result in additional cost savings to
the Company and improved turnaround time on this process.
The Company continues to have plans to increase its production capability in the
foreseeable future by 50% to 100%, as influenced by market conditions,
availability of manufacturing equipment on the open market and product sales
demand. Accordingly, this expansion will require additional capital which is
anticipated to be raised in various combinations of capital leases, bank debt
and/or equity offerings. At this time, the Company has no definitive budgets or
timetables for such expansion and this expansion, if any, will be dependent upon
market demand for the Company's products. Management is of the opinion that
sufficient demand will be present, as supported by new product development and
increased product marketing efforts, to justify this expansion. However, there
can be no assurance that the Company will be able to obtain additional funding
or, that such funding, if available, will be obtained on terms favorable to or
affordable by the Company.
(5) Product Research and Development
The Company believes that research and development activities will allow for the
development and introduction of new products into the ammunition marketplace.
Over the next 12 calendar months, the Company anticipates completing the design,
development and introduction of its new patent-pending projectile for use in
ammunition specifically for the public safety and security marketplace,
especially in the rapidly expanding U. S. Air Marshall program. Management also
believes that this projectile will have wide acceptance in the home security and
sport hunting markets.
Further, additional ammunition calibers and/or projectiles may be developed by
the Company depending upon market research, acceptance in the marketplace of
existing products and production capabilities. At this time, there are no
definitive plans for the further introduction of other new products into the
marketplace.
Part II - Other Information
Item 1 - Legal Proceedings
None
23
Item 2 - Changes in Securities
On July 25, 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to Gala Enterprises, Ltd., an existing shareholder, for cash
proceeds of approximately $100,000. This sale was made at a price of $0.26 per
share, which approximates the discounted "fair value" of the Company's common
stock based on the quoted closing price of the Company's common stock on the
date of the respective transaction. The proceeds were used to reduce the
Company's outstanding balance on a long-term note payable to a bank.
On August 14, 2002, the Company sold 384,615 shares of restricted, unregistered
common stock to Gala Enterprises, Ltd., an existing shareholder, for cash
proceeds of $100,000. This sale was made at a price of $0.26 per share, which
was below the discounted "fair value" of the Company's common stock based on the
quoted closing price of the Company's common stock on the date of the respective
transaction. The differential between the discounted "fair value" (approximately
$0.29 per share) and the selling price resulted in a charge to operations of
approximately $11,346 for compensation expense related to common stock issuances
at less than "fair value". The proceeds were used to reduce the Company's
outstanding balance on a long-term note payable to a bank.
On August 21, 2002, the Company sold 20,506 shares of restricted, unregistered
common stock to an existing shareholder for cash proceeds of approximately
$6,152. This sale was made at a price of $0.30 per share, which approximates the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds were used to retire trade accounts payable to a New
Mexico law firm for legal services rendered to the Company.
On September 20, 2002, the Company sold 277,778 shares of restricted,
unregistered common stock to Access Investments, Inc., an existing shareholder,
for cash proceeds of approximately $100,000. This sale was made at a price of
$0.36 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction. The proceeds were used to reduce the
Company's outstanding balance on a long-term note payable to a bank.
On September 26, 2002, the Company sold 277,778 shares of restricted,
unregistered common stock to Access Investments, Inc., an existing shareholder,
for cash proceeds of approximately $100,000. This sale was made at a price of
$0.26 per share, which approximates the discounted "fair value" of the Company's
common stock based on the quoted closing price of the Company's common stock on
the date of the respective transaction. The proceeds were used to provide
working capital liquidity for future periods.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
On October 4, 2002, the Company issued an 8.0% Convertible Debenture (Debenture)
in the face amount of $250,000 to La Jolla Cove Investors, Inc. (Holder) and a
Warrant which allows the Holder to purchase shares of common stock equal to ten
(10) times the number of shares of common stock issued to the Holder on
conversion of the Debenture. In no event shall the number of shares issued under
the Warrant exceed 30,000,000.
The Debenture bears interest at 8.0% and matures two years from the date of
issuance. The Debenture is convertible into common stock, at the option of the
Holder, at the lesser of $1.00 per share or 80.0% of the average of the 5 lowest
volume weighted average price days during the 20 trading days before, but not
including the date of the Holder's election to convert. The Warrant is
exercisable at the same price.
24
The full principal amount of the Debenture is due upon default, as defined in
the Debenture agreement. The Debenture interest is payable monthly in arrears
commencing on November 15, 2002.
The Company is obligated to file a Registration Statement under the Securities
Act of 1933 to register the underlying conversion shares on either Form SB-2 or
S-3 and have said Registration Statement effective no later than 120 days after
October 4, 2002. Further, the Holder has agreed to convert not less than 5.0%
and not more than 10.0% of the original face value of the Debenture monthly
beginning the month after the effective date of the Registration Statement and
the Holder is required to exercise warrants and purchase shares of common stock
equal to ten (10) times the number of shares of common stock issued to the
Holder on conversion of the Debenture.
The Holder has further contractually agreed to restrict its ability to convert
the Debenture or exercise their warrants and receive shares of the Company's
common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock of the Company.
In the event an election to convert is made and the volume weighted average
price of the Company's common stock is below $0.30 per share, the Company shall
have the right to prepay any portion of the outstanding Debenture that was
elected to be converted, plus any accrued and unpaid interest, at 125.0%.
The Holder may demand repayment of the Debenture of 125.0% of the face amount
outstanding, plus all accrued and unpaid interest, in cash at any time prior to
the date that underlying Registration Statement under the Securities Act of 1933
has not been declared effective by the U. S. Securities and Exchange Commission
within 3 business days of such demand. If the repayment is accelerated, the
Company is also obligated to issue to the Holder 25,000 shares of common stock
and $10,000 cash for each 30 day period, or portion thereof, during which the
face amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
If the Holder does not elect to accelerate the Debenture, the Company shall
immediately issue and pay to the Holder 25,000 shares of common stock and
$10,000 cash for each 30 day period, or portion thereof, during which the face
amount, including interest thereon, remains unpaid with the cash payment to
increase to $15,000 for each 30 day period the balance remains unpaid after the
initial 90 day period.
Concurrent with the execution of the Debenture agreement, the Company executed
an engagement letter with the Holder's counsel for legal representation with
regard to the preparation of the aforementioned Registration Statement under the
Securities Act of 1933.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits - None
Reports on Form 8-K - None
--------------------------------------------------------------------------------
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Ammunition, Inc.
Dated: October 18, 2002 /s/ Andres Fernandez
---------------- -------------------------------
Andres Fernandez
President and Director
25
CERTIFICATIONS
I, Andres Fernandez, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of American
Ammunition, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
/s/ Andres Fernandez Dated: October 18, 2002
-------------------- ----------------
Andres Fernandez
Chief Executive Officer (or the equivalent thereof)
I, Andres Fernandez, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of American
Ammunition, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
/s/ Andres Fernandez Dated: October 18, 2002
-------------------- ----------------
Andres Fernandez
Chief Financial Officer (or equivalent thereof)